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MND NewsWire features plain and simple interpretations of industry related data and events written in a manner that maintains the interest of random readers while still catering to the perspective of a housing market professional.

At least that was the headline on the editorial page of the Wall Street Journal earlier this month when Cyril Moulle-Berteaux, a managing partner of Traxis Partners LP, a hedge fund firm based in New York made his case that the housing market is hitting bottom right now.

Some of what he says makes sense; some sounds more like tip-toeing past the graveyard; but his arguments are worth looking at so we can look back in six months and judge his claims historically.

Remember, while we review Moulle-Bereaux's arguments, that the Journal's news pages are known for straightforward and bias-free reporting, but the paper's editorial pages are widely regarded as being in the service of politicians and corporate America. While op-ed pieces tend to be more balanced than the editorials, they still tend to have a rightward tilt.

Moulle-Bereaux prefaces his arguments with the caveat that he does not expect prices to return to 2005 levels; in fact he feels that may not happen for another 15 years. He is merely stating that the downward trend in sales and pricing is not intensifying as the financial and mainstream press would have us believe.

The current housing bust, he says, is actually nearly three years old. Sales hit their peak of 1.4 million annualized sales in the summer of 2005 and have dropped 63 percent since then. Housing starts are down more than 50 percent which, when adjusted for population growth, takes them back to the previous lows of 1982.

In addition, residential construction now represents only 3.8 percent of Gross Domestic Product; a 15 year low, and will probably set an all time low by the fourth quarter of 2008.

But, Moulle-Bereaux argues, the very factor that caused the bust in the first place is going to save the market: affordability.

Americans enjoyed virtually unprecedented access to homeownership during the 1990s and early 2000s. It took 19 percent of average monthly income to service a conforming mortgage on an average home purchased during that period. But, as prices increased by double-digit percentages in many parts of the country during 2005 and 2006, mortgage costs rose to 25 percent of monthly income. And for first-time homeowners the cost of homeownership went from 29 percent of income to 37 percent and buyers who actually intended to live in the houses they were purchasing began to pull back.

The good news, bad news is that prices have now fallen an average of 10 to 15 percent ' much more in some previously hot markets ' while incomes have continued to rise; (while there is a school of thought that would argue strenuously that real wages have actually been stagnant, we will grant Moulle-Bereaux his point) while mortgage rates are down 70 basis points from their peaks. Guess what, housing has returned to the 19 percent of monthly income level for repeat buyers and 31 percent for the first-time homebuyer.

"In other words," Moulle-Bereaux says, "homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in."

But what about all of those unsold houses? Can prices stop falling with so many houses in foreclosure or standing vacant and unsold? Moulle-Bereaux relies on history to assure us they can.

He references five past market corrections and claims that in each, when home sales bottomed, "the pace of house-price declines was halved within one or two months." This because, by the time sales stop dropping, inventories have usually already dropped as well.

That, he says, is the case right now. New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March, an 11 months supply. And while this is a 25-year high, it is similar to the situation in 1974, 1982, and 1991 when such data was followed by slowing in home-price declines within the next six months.

Inventories are being brought down because construction activity has been falling for such a long time that new home sales are about on a par with home completions, and sales should be pulling ahead, perhaps by as much as 50 ' 100,000 units annually, in a matter of months.
He speculates that inventories will drop even faster to 400,000 ' or seven months of supply ' by the end of 2008 which will impact on prices, although they won't stop falling entirely until inventories reach five months of supply, a level that has historically signaled tightness in the market, sometime in 2009.

Here he is overlooking any impact of inventories of existing homes. In March, the last month for which data is available, the National Realtors Association estimated a backlog of 4,058,000 unsold homes or a 9.9 months supply. This was a 1 percent increase over the February number. Unlike with new homes, there is no convenient spigot to turn-off the number of previously-occupied homes coming onto the market. People continue to be transferred, downsize, or die while forced sales and foreclosures appear set to continue for the short term.
But assuming that Moulle-Bereaux reading the housing tea leaves correctly, how will all of this affect the broader economy? MOULLE-BEREAUX lays out a number of positives:

The housing market has been subtracting a full percentage point from GDP for almost two years. Any improvement in the market should stop this bleeding.

When the rate of price declines comes down "there will be a wholesale shift in market perceptions." The market is valuing houses, i.e. the collateral for existing and future loans as though the declines will continue for another two to three years. When this perception changes it will have significant impact on the view of future delinquencies, foreclosures, and credit losses that lenders expect they will face.

Fewer homeowners will be underwater on their mortgages and will thus have less incentive to walk away from their obligations.

Reaching further out, a slowing house-price decline could stabilize if not increase the value of a lot of the securitized mortgages that have ravaged the financial markets with write-downs and subsequently reported losses. "Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related to housing, the financial system, and the economy."

So is Moulle-Bereaux a prophet or merely unduly optimistic. Let's mark our calendar to take another look at his predictions in six months to see how well they hold up.

Comments

Dream on! This is the Administration's attempt to quiet the financial markets and stop any further panic. Remember, this is an election year as well!
The sad fact is that there is a substantial amount of subprime mortgage resets occuring in 2008approximately $500 billion. It will take months before these too show up as foreclosures. Most likely at the end of '08 or Q1 2009.

Brian

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I am a mortgage Broker and talk to clients in the market on a daily bases so I see what is truly going on from the front lines. I see this from the eyes of the borrowers as well as the tightening of guidelines from the investors out there. I will bet him a million dollars that in 6 months he is going to wish he had not voiced his optimistic point of view because the opposite came true!

DIANA N.

on

What Never Never Land is he living in? He should go out into the real world like us appraisers and see the true picture, which is pretty GRIM.

Down payment savings

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There are very few lenders going for 100% property value loans now days. So how does it take to save $15,000 for a down payment? At $60 a week maybe five years from now these folks can buy a $150,000 home. Fannie Mae is becoming more strict with the eligibility factors. Of course I don't write for the WSJ and this an election year so the economy needs to improve before November.

Anonymous

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What a spin-doctor. He reads a bit like yesteryears, David Lereah (NAR).

Mike Wolpin

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Hello?!@#$? This will have absolutely no affect on the real challeges for middle american consumers. A. Home prices in growth areas are still grossly over inflated and equity is artificial. B. Underwriting criterion restricts qualification. C. Average people can't afford houses. D. Appraisals are not coming in at sales prices. (Much lower) E.Average people are loosing their homes in foreclosure. F. Average people whom have lost their homes due to sub prime and adjustable loans, no longer have good credit. G. Average people don't qualify to be renters. Come On!

Donn B.

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"Mission Accomplished" !!

Bill

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It is nice to talk about a national market in one context and then a regional or local in another. The majority of residential markets are really not in free fall so these will perform well and will reduce the stress modeled with national data. Once "hot" markets in places like CA, AZ, FL, and NV will not rebound with the national market. These markets trended much higher than the national market in the up market and will trend much lower in the down market. Here is the basic fact you can not afford a $1,000,000 house if you make $150,000 per year. So income will drive values in general as as always been the case except for some unique narrow markets. If you look at income and price, then places like SoFL and California have much pain left to feel.

Anonymous

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Someone has to be opitmistic...because the real world, everyday American homeowners that have struggled through this crisis are drained. Being optimistic isn't going to change what we are faced with when we go out to earn a living everyday. We need a change now!

Anonyomous

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Restrictive lending practices? As a long time mortgage broker with over 20 years in the business- I would not call most lending practices restrictive. Buying a home is not a right- you must be able to afford it! If you cannot save the 3-5% down payment- how can a buyer be prepared for future home maintaince? While we do not need to go back to 1980 lending requirements- to avoid future problems, lending guidelines needed to be tightened. Stated Income, 100% financing, low credit score loans were foreclosures waiting to happen. Why is everyone so surprised?

fairytalesnfauxfurs

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I am a mortgage loan underwriter and boy is this guy dreaming. The guidelines are so tight now that even if you do qualify financially the average individuals credit won't have the scores to purchase. I have seen my own scores drop for no reason and I think the credit bureaus are controlled by the govt. On the flip side. The cost of living these days is way too high so many people just can't keep up with the bills. Many familys are walking away from their homes and downsizing to an apartment.

Ardy

on

I work in origination, underwriting, and servicing, and I do think more servicing options should be offered. My program offers a variety of work out options, yet the big servicers never seem to offer these, they just begin the foreclosure. On the flip side many homeowners shoot themselves in the foot by not taking action more quickly when they realize they are in over their head, they usually leave the lender with little or no choice. It does amaze me STILL at the number of lenders who are still trying to push poor credit qualify loans through UW does anyone ever learn?

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